Canada: Can A Cause Of Action Be Assigned In A Corporate Transaction?

What happens when a key asset of a target corporation is a cause
of action? Can it be assigned to the purchaser in an asset purchase
or to a "Newco" in a corporate restructuring?

It is a longstanding common law principle that a bare right of
action in tort is not assignable. This is because it is considered
to be tainted by "maintenance" or "champerty".
"Maintenance" occurs when a third party who does not
otherwise have an interest in the litigation provides financial or
other assistance to one of the parties to the litigation.
"Champerty" involves a third party engaging in
maintenance for a share in the proceeds of the litigation. Such
"officious intermeddling", "stirring up of
strife" and "trafficking in litigation" is
considered to be an abuse of the court's process. Therefore,
where a bare right of action has been assigned, a defendant can
seek to have the claim struck as an abuse of process or may defend
the claim on the basis that such an assignment is void.

However, as confirmed in two recent cases, there are exceptions
to this general rule including: (a) where the assignee has a
pre-existing property interest and the litigation is ancillary to
that interest; and (b) where the assignee has a legitimate
commercial interest in the litigation.

Both of these exceptions were considered and applied in Silverado Oilfield Ventures Ltd v
Davidson. In that case, Silverado commenced an action
against a former employee and her husband for defrauding the
company of $1.5 million. Silverado went into receivership and its
assets, including the action, were sold. The purchaser continued
the action. The defendants applied for an order striking the claim
as an abuse of process on the grounds that the assignment was
champertous. The chambers judge granted the application and struck
the claim.

The Alberta Court of Appeal set aside the order
and reinstated the claim. The Court found that Silverado's
assets had been acquired for the purpose of carrying on its
business. The cause of action was for the wrongful conversion of
some of Silverado's assets. The recovery of the wrongfully
converted assets of the business was clearly ancillary to the
business being acquired. This interest antedated the formal
assignment: it was the purchaser's offer to buy the business
which gave rise to its interest in having the cause of action
assigned and the purchase of the business conceptually preceded the
assignment of the cause of action.

The legitimate commercial interest exception was also applied in
Fission Uranium Corp v Dahrouge. The
cause of action in that case was against a former President and COO
for breach of fiduciary duty for usurping a corporate opportunity
in relation to certain mineral claims. After it commenced the
action, Fission was involved in a reverse takeover and a corporate
restructuring. The cause of action was assigned and then assigned
again in a series of spin-offs. Certain of Fission's other
mineral properties were transferred or sold to the spun-off
company. The Court accepted that the assignments were related to a
series of bona fide business arrangements. The Court concluded that
the assignments were not void and refused to summarily dismiss the
claim on that ground.

Thus, despite the rule against maintenance and champerty, a
right of action may be assigned in a corporate transaction so long
as it is tied to the purchase of related assets or is part of a
larger bona fide business arrangement.

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